Binary options trading platform
Encyclopedia
Binary options trading platform (also called binary options web-site) is a web-based, over-the-counter, real-time trading arena, which offers nonprofessional investors a way to profit from correct, short term predictions of some underlying asset (e.g., stock, commodity, currency, index) price movement by buying binary options on that asset.
Binary options platforms have been growing rapidly since mid-2008. It is estimated that around 30 such platforms (including white label products
) have been in operation as of January 2011.
The user-friendly-commission free platforms offer standardized short term binary options with a pre-determined profit/loss, that cannot be liquidated (buy or sell to close) before expiry. These binary option platforms offer options on some 70 underlying assets, and a profit scenario of 61% to 85% on options that expire in the money and also weekend trading that offers payouts as high as up to 400%.
) or lower (in the case of a put option
) at the option's expiration. Binary options are offered for a time period of 60 minutes or less and are traded until 10 minutes before expiry.
Once a trader places a trade he sets the spot price
of the underlying asset as the strike price
for the option. From that moment on, if the price of the underlying asset increases and closes above this strike price by even as much as 1/100 of a point the option will expire in the money (for call option). If the price of the underlying asset hasn’t changed at expiry, the investor receives his money back.
As opposed to exchange-traded binary options providers such as American Stock Exchange
(Amex) or Chicago Board Options Exchange
(CBOE), the binary options platforms do not charge any direct fees from investors buying an option.
The profit to investor from an option that expires in the money
will usually be between 61% to 85% on the initial investment (depending on the underlying asset). In case of expiry out of the money the investor will get a rebate of between 0% and 15% on his investment. In most platforms there is a minimum amount for investment, starting from as low as $10.
Another common form of binary option that is traded is a touch/no-touch, also called one-touch binary option. In one-touch binary option, if the price of Google
's stock (NASDAQ:GOOG) is at $495 and a trader predicts that the stock will "touch" the $500 mark during the trading period he can buy a one-touch option. Once the stock's value "touches" the $500 mark, the trader would immediately earn a 60%-70% gain. If the stock doesn't touch the predicted range by the end of the trading period, the trader looses 85% to 100% of the investment.
are the volumes of transactions made for each outcome, (S) is the platform gain.
As the platform’s gain comes from the above formula, most platforms will be indifferent as to the outcome of a single trade. Note that if
is not equal to 
then the platform will have to act as a market maker. This can cause the platform gain (S) to be more volatile then in the above formula. In a fair platform in order for the investor to make a long term profit he has to predict correctly 54.5% of the time.
because of their negative cumulative payout (they have an edge over the investor) and because they require little or no knowledge of the stock market to trade in.
Most platforms have their investors sign a “Terms and Conditions” document before trading that warns the investors about the risk involved in dealing with binary options. However, in light of the high risk involved, it would be expected that the risk of trading in binary options will appear in this document in bold letters as well as on the platform itself. In addition, advertisements for binary option trading platforms tend to highlight only the high profit but not the high risk involved.
Binary options platforms have been growing rapidly since mid-2008. It is estimated that around 30 such platforms (including white label products
White label product
A white label product or service is a product or service produced by one company that other companies rebrand to make it appear as if they made it.-History:...
) have been in operation as of January 2011.
The user-friendly-commission free platforms offer standardized short term binary options with a pre-determined profit/loss, that cannot be liquidated (buy or sell to close) before expiry. These binary option platforms offer options on some 70 underlying assets, and a profit scenario of 61% to 85% on options that expire in the money and also weekend trading that offers payouts as high as up to 400%.
Platform trading
Trading on binary option platforms can be done with little to no knowledge of the stock market. An investor will only need to choose whether the price of some asset (underlying asset) will be higher (in the case of a call optionCall option
A call option, often simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option. The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument from the seller...
) or lower (in the case of a put option
Put option
A put or put option is a contract between two parties to exchange an asset, the underlying, at a specified price, the strike, by a predetermined date, the expiry or maturity...
) at the option's expiration. Binary options are offered for a time period of 60 minutes or less and are traded until 10 minutes before expiry.
Once a trader places a trade he sets the spot price
Spot price
The spot price or spot rate of a commodity, a security or a currency is the price that is quoted for immediate settlement . Spot settlement is normally one or two business days from trade date...
of the underlying asset as the strike price
Strike price
In options, the strike price is a key variable in a derivatives contract between two parties. Where the contract requires delivery of the underlying instrument, the trade will be at the strike price, regardless of the spot price of the underlying instrument at that time.Formally, the strike...
for the option. From that moment on, if the price of the underlying asset increases and closes above this strike price by even as much as 1/100 of a point the option will expire in the money (for call option). If the price of the underlying asset hasn’t changed at expiry, the investor receives his money back.
As opposed to exchange-traded binary options providers such as American Stock Exchange
American Stock Exchange
NYSE Amex Equities, formerly known as the American Stock Exchange is an American stock exchange situated in New York. AMEX was a mutual organization, owned by its members. Until 1953, it was known as the New York Curb Exchange. On January 17, 2008, NYSE Euronext announced it would acquire the...
(Amex) or Chicago Board Options Exchange
Chicago Board Options Exchange
The Chicago Board Options Exchange , located at 400 South LaSalle Street in Chicago, is the largest U.S. options exchange with annual trading volume that hovered around one billion contracts at the end of 2007...
(CBOE), the binary options platforms do not charge any direct fees from investors buying an option.
The profit to investor from an option that expires in the money
In the Money
In the Money is a comedy film starring The Bowery Boys. The film was released on February 16, 1958 by Allied Artists Pictures and is the forty-eighth and final film in the series. It was directed by William Beaudine and written by Al Martin and Elwood Ullman.-Plot summary:Sach is hired to take...
will usually be between 61% to 85% on the initial investment (depending on the underlying asset). In case of expiry out of the money the investor will get a rebate of between 0% and 15% on his investment. In most platforms there is a minimum amount for investment, starting from as low as $10.
Examples of a binary option trades
A trader believes that McDonald’s stock (NYSE:MCD) will close above the current (spot) price of $74.93 by the end of the hour. The trader can invest $100 in McDonald’s binary call option on that outcome. If his prediction is correct his payout is $170 (70% profit). If he is incorrect and the stock closes below the strike price he loses 85% of his investment (gets a rebate of $15).Another common form of binary option that is traded is a touch/no-touch, also called one-touch binary option. In one-touch binary option, if the price of Google
Google
Google Inc. is an American multinational public corporation invested in Internet search, cloud computing, and advertising technologies. Google hosts and develops a number of Internet-based services and products, and generates profit primarily from advertising through its AdWords program...
's stock (NASDAQ:GOOG) is at $495 and a trader predicts that the stock will "touch" the $500 mark during the trading period he can buy a one-touch option. Once the stock's value "touches" the $500 mark, the trader would immediately earn a 60%-70% gain. If the stock doesn't touch the predicted range by the end of the trading period, the trader looses 85% to 100% of the investment.
Business model
The platforms do not charge fees from their investors. Their profit comes from the difference between the options that expire in the money to options that expire out of the money. This difference can be found by the formula below. In this, (W) is the in the money option payout in percentage terms (e.g. 1.7), (L) is the out of the money option payout in percentage terms (e.g. 0.15), (P) is the probibility (in this case (P) = 0.5), are the volumes of transactions made for each outcome, (S) is the platform gain.As the platform’s gain comes from the above formula, most platforms will be indifferent as to the outcome of a single trade. Note that if
is not equal to then the platform will have to act as a market maker. This can cause the platform gain (S) to be more volatile then in the above formula. In a fair platform in order for the investor to make a long term profit he has to predict correctly 54.5% of the time.Platform fairness
When judging the fairness of a platform the following points should be taken into account:- The platform has a high trading volume.
- The platform offers price quotes from a reliable third party data provider (e.g. Thomson ReutersThomson ReutersThomson Reuters Corporation is a provider of information for the world's businesses and professionals and is created by the Thomson Corporation's purchase of Reuters Group on 17 April 2008. Thomson Reuters is headquartered at 3 Times Square, New York City, USA...
). - The platform offers the same price quotes for simultaneously buying a put or a call option on the same base asset, strike price and expiration time.
- The platform is managing its exposures correctly (i.e. covering a call option trade with a relevant put option trade) meaning that the investors are not trading against the platform but against other investors on the platform.
Regulation and compliance
On non regulated platforms clients’ money is not necessarily kept in a trust account, as required by regulation, and transactions are not monitored by a third party to ensure fair play.Criticism
These platforms may be considered by some as a gaming platforms rather than investment platformsbecause of their negative cumulative payout (they have an edge over the investor) and because they require little or no knowledge of the stock market to trade in.
Most platforms have their investors sign a “Terms and Conditions” document before trading that warns the investors about the risk involved in dealing with binary options. However, in light of the high risk involved, it would be expected that the risk of trading in binary options will appear in this document in bold letters as well as on the platform itself. In addition, advertisements for binary option trading platforms tend to highlight only the high profit but not the high risk involved.